7/19/2010 @ 6:00AM

Transcript: David Cordani

Forbes: Heading one of the most outstanding insurance companies in the world, I have to ask you a broad question: Why can’t we have in health care the same kind of free enterprise, productivity, innovation that we have everywhere else in the economy?

Cordani: Well, we have some pockets of it, which is the good thing. We have some pockets that we can build off of. But within health insurance, if you look at the broader insurance, what you have is a legacy of multiple decades of slow innovation, many parties and in some cases misaligned incentives or a nontransparent environment. But the good news is we see some tremendous pockets of innovation that are driving really good outcomes right now that we need to build on.

Cordani: Well, for
Cigna
, we look at ourselves actually as a health service company, as opposed to a health insurance company. So it’s a service-oriented provider. And what we’ve been able to prove over the last four years is with a well-designed benefit program, good incentives, transparency and assistance programs, we’re able to take costs out of the system to the tune of 26% over four years.

Forbes: Define “consumer-driven policies,” which you’ve been advocating and pushing.

Cordani: There’s two ways to look at them. The classic way is they’re fund-based programs where individuals have a fund of resources– dollars, typically their money and employer dollars. And they spend those dollars against their health care consumption up to a certain level before more traditional indemnity-based programs would kick in.

Forbes: Sort of health savings accounts?

Cordani: Health savings accounts, health reimbursement accounts. More broadly, you can have a very well-designed coinsurance program that just has a sharing mechanism. The whole goal is getting the incentives aligned.

Because then you get a little more retail engagement by the individual and you get a little bit more receptivity to the quality and cost, transparency and then you just find better engagement around health improvement as well, from the individual.

Reducing Costs

Forbes: You say 26% reduction in consumers, patients charge.

Cordani: Over a four-year period of time we’ve seen 14% in the first year grow to 26% over a four-year period of time. And very importantly, driving that is an increased use of prevention–not a decrease–an increased compliance with medication. Very importantly, the No. 1 gap in health care is noncompliance with medication. And very importantly, an increased used in a highest-quality services or physicians. So you don’t see inappropriate rationing, rather you see more utilization of the right care and less utilization of the less effective or less efficient care.

Forbes: Now in terms of getting more free enterprise, would you favor allowing nationwide shopping for insurance? For example, I live in New Jersey. They have crazy regulations. Wisconsin is much cheaper than New Jersey.

Cordani: It’s true.

Forbes: Should we have nationwide shopping?

Cordani: So, philosophically, we believe in a few important pieces. One, the role and the responsibility with the individual; two, transparency; three, choice. So under that umbrella, my answer would be yes. But it’s important to note that the cost of health care is local. So the cost of the delivery system, be it physicians or hospitals, is local. But to your very important point, the mandates around coverage and norms vary state by state. So we have 50 sets of norms. Therefore, again, we value choice and transparency, so we would be very open and supportive of that.

Forbes: What about equal tax treatment? As a business I get a deduction; an individual, unless you’re self-employed, you’re already at a 40% disadvantage.

Cordani: Yes, back to a philosophical belief. In terms of the role of the individual, choice and transparency, we think the disincentives around the tax treatment need to be unwound. And there’s an opportunity, again, to enable individuals to become more retail owners of their health care, regardless of whether or not it’s enabled through a governmental agency, an employer, or purchased as an individual.

Forbes: So, again, when you look where free markets are allowed to operate for the eyes, whether it’s Lasik surgery, whether it’s contact lenses–a fraction of the cost they were a few years ago, precisely because consumers write the check, so therefore providers have every incentive to make it more affordable, more productive. How do we get more of that in the rest of health care, especially after ObamaCare?

Cordani: I think there’s really two major enablers. There’s always multiple, but there’s two major enablers. One is information. It’s hard to argue that we have a $2 trillion-plus industry that this is opaque from information around quality and cost of service. And we have an environment where we reimburse for services, the government as well as intermediaries, based upon quantity of services, not based on quality of outcomes. So we believe the two big enablers are information. Let’s take advantage of the transparency that exists in almost every other industry around quality and cost. And then incentive alignment–pay for outcomes and quality of outcomes, as opposed to just volume of services and activities. Those are really the two big enablers. And we’ve been driving a variety of initiatives as a company around that. And we’ve been working pretty collaboratively with the government to lever the power of CMS and Medicare to drive that yet even further.

Forbes: Because, for example, wearing a brace, you hear stories and under Medicare, if you just sign off on it, $350. If you go on the Internet, somebody told me you can find an equivalent one for $47.

Cordani: Correct. Correct. And you take that example and that’s back where when we talk about the broad umbrella of consumerism or consumer engagement. You take the neck brace. I’ll give you another wonderful example. In any given city, there’s a variety of places you can access an MRI service. The United States consumes more MRI images than almost any country in the world. And in any given city, the cost variability is great, from arguably a $500 MRI to a $2,500 MRI.

If the individual is not engaged in that decision, you might be going to the $2,500 MRI and not be aware of it. But if you have an incentive to be interested and you look online or for some other services telephonically and you see there’s choices, what you’ll find is that individuals are typically rational consumers of service and will pursue value. And that’s another great example, just like your neck brace.

Repeal ObamaCare?

Forbes: With ObamaCare, let me ask you bluntly, do we need to repeal and start over?

Cordani: I don’t think it’s in our country’s best interest to focus our energy on repealing and starting over. And the reason why I say that is we’ve expended well over a year of the country’s energy to get to where we are. What I do believe is mission critical is we can’t stop where we are, because the legislation as enacted expands access to additional insurance, but it doesn’t address two very important additional legs on the stool–improving overall cost and improving the overall quality of health care that’s delivered.

So we could turn the conversation to health care from just the financing of sick care. So I’d rather see us for the next six to 12 months focus on building a sustainable program than expending another year trying to repeal this and stop us in our tracks as a country.

Forbes: Well, let’s look at some of the things in that bill in a broad sense. Seventy billion dollars in fees that the industry is going to have to pay–not very helpful. Cost shifting, especially with Medicaid, which is now becoming more and more of a disaster. More and more providers are saying this is just too low, they’re not going to do it, yet we’re pushing more and more people under that, which is going to distort the system even more. Can those kind of systemic flaws be addressed?

Cordani: I think if I take the core of your question, a big portion of what the legislation did in its attempt to expand access to care was to secure funding sources for that expansion of the care, which is just additional taxes and fees. That’s unsustainable. To the core of your question, that’s unsustainable. And if we only focus on trying to figure out who writes the check for an ever-increasing pie, we’ll be chasing ourselves. So that’s where we have to step back and say, “Those are short-term solutions that just push a bigger problem down the path.” We need to step back and say, “Now, how do we use the information around quality and cost transparency and send people to take care of their health and send people to pursue the highest-quality care and incent those physicians and hospitals that are delivering the highest-quality care to be paid more, while those who are not to be paid less?” That’s the building block.

But to the core of your question, if we solely focus on charging more taxes to a variety of folks, be it our industry, cost-shifting from Medicaid to the commercial system or increasing taxes to individuals, that is not going to be a sustainable proposition and it’s not going to allow our country to be vibrant in a global economy.

Forbes: Another thing in terms of mandating or access, anyone who is rational, especially a young person, why not pay a couple of hundred and if you need it, then you go for it?

Cordani: Yeah, I think there’s a real slippery slope there in the way the law is articulated.

I think everybody agrees, most people agree with the aspiration of having everybody into the system. The challenge is the current, to your point, if you will mandate, doesn’t have a hook in it that would drive people into the system. So if an individual could pay $95 or then $195 or $295 as a penalty or have the ability to opt in only when they need it, it will drive further inefficiency to the system and further cost pressure, which will spiral the problems you identified previously. We agree with that.

Health Care Arbitrage

Forbes: Now, businesses. Are you going to have the same kind of arbitrage there? Businesses seeing costs go up and then they say, “Oh, I’ll pay the fine.” And then you go in an exchange and see what you can find.

Cordani: I think there’s a lot to play out, and there’s a lot we don’t know in terms of how business behavior will transpire over the next several years. I think there’s a few things that are pretty safe bets. One, to your prior comments, costs will actually accelerate, not decelerate, for businesses in an environment where they’re already feeling cost pressure in their overall business, and very importantly, as you know, competing in a global economy.

Therefore, what we see is more businesses than ever are looking for additional solutions around health engagement, wellness programs, the use of incentives and transparency to drive more sustainable cost improvements. We think that’s a good thing. And regardless of whether an employer wants to potentially, potentially opt out of the system into a government-run alternative or exchange for an alternative in 2014 or 2015, that’s actually in everybody’s best interest because the individual needs to get engaged. I don’t believe we’ll see a mass exodus in 2014 because employers still have to compete for talent. I do think in 2014 on our current trajectory, you will see some employers who will pay the penalty and opt out of the system, if they believe that the exchanges will work for their employees.

Fixing the Reform

Forbes: So pretend you were a dictator for a moment and can amend the bill; we’re not going to repeal it. What are the major things that have to be done to get away? Because what the bill really in essence did, perpetuate the system that created the problem in the first place, and just try to build around it instead of getting to the core.

Cordani: So you used the word dictator. I think you said if I had the ability to wave a wand, I would probably focus on three items.

Forbes: Benevolent dictator.

Cordani: Benevolent dictator. I would, No. 1, ensure that all programs–be they state, federal or employer-enabled–focus on prevention and wellness, because there’s enough information that the clinical community agrees with that says that there should be zero disincentive for individuals to get the right prevention and wellness engagement. Be they mammographies, colonoscopies, childhood immunizations, basic checkups, etc. Two, I would ensure that all programs, and I mean all programs, have fundamental incentives for individuals to take a more active role in their overall health. The reason is because there’s enough clinical data to suggest that 70% of health issues are tied to personal choice.

So we have the ability to actually bring the conversation back to a health conversation vs. just a “sick conversation.” And third, I would focus my third chip on rebuilding the reimbursement and incentive system to physicians and hospitals to pay on quality of outcome, not just volume of service. Those would be the three chips. And stringing it together, I would use the information and transparency.

Forbes: Now is that possible with a system that’s becoming more and more government-dominated; more and more government presence?

Cordani: Well you gave me the benevolent dictatorship role. I actually do believe it’s possible, though, as well, because what you really have is you have four systems running simultaneously.

Getting Quality Care

Forbes: How do we get to quality, where in a private market, people develop metrics pretty quickly in gauging in this works, this doesn’t work, this hospital gets it, this does not.

Cordani: Yes, I think the way we get there is a couple-fold. So I’ll leave the benevolent dictator and go back to market forces. The good news is today, we have physician and hospital leaders who are engaging in this conversation.

For example, we at Cigna have a dozen fully functioning pilots up and running with either medical homes, so built around the physician practice, or accountable care organizations built around hospitals, where we’ve essentially revisited the entire information flow and incentive process to pay based upon quality of outcomes vs. just activities. So to your prior point, market forces are already engaging where people realize the status quo is not sustainable and information exists to allow forward-looking leaders in those physician groups or hospitals to engage. So I think that will transpire. What we would like to see more of, Steve, is to see the power of CMS and Medicare, which currently pays for about 45 million Americans, who consume on average more than two times the medical cost of a 40- or 50-year-old person.

So you have essentially up to 100 million Americans, if you will, equivalent’s worth of medical cost to use their information and their reimbursement to do the same thing. That will be a game-changing moment for the country. But currently, free enterprise is driving that today. And again, we have over a dozen of those pilots up and running. And that’s where I garner some of my optimism because again, the leaders in the physician community, in the hospital community want to drive change to make it sustainable.

What Happens to Medicare?

Forbes: So the problem with Medicare, and this is the danger, is it’s a laggard on innovation. Some, I’ll exaggerate a little bit, but it seems like it’s 20 years before they get something that’s been out there.

Cordani: Yeah, I think there’s an enabler. I try to look at the glass is half full. So as I look to the future, there’s an enabler here. And that’s the intellectual honesty that Medicare is going to have a cash flow problem in a few short years. Back to that prior dialogue is there’s not enough money to pay for the system if it stays on the current course and speed.

And I think the good news is behind closed doors; people understand that. People understand we need to do an “and,” not an “or.” So some of the changes that have been made are necessary, but per se, not sufficient. And now, we’re working collaboratively with the government to try to build those next two legs on the stool around quality and cost transparency and the ability to again use some of the power of Medicare, which is the No. 1 payer for just about every hospital or physician group, to start to drive some of this transparency and incentives.

Forbes: What’s going to happen to Medicare Advantage? It seems they’re going to try to drive it out one way or the other.

Cordani: That’s an unfortunate item. As you probably know, Cigna is a very de minimus player.

Forbes: But you have a partnership with
Humana
.

Cordani: We’ve structured a wonderful partnership with Humana, arguably the brand leader in the space who’s focused on it from a quality standpoint, service delivery, etc. So for the benefit of our employer customers, we feel great about that alliance that we’ve been able to structure.

As you articulated, though, the legislation squeezes Medicare Advantage pretty severely, and I think what that’s going to do is it’s going to cause, No. 1, only a few very well-run, innovative, continuous improvement players to thrive in that. And we believe Humana is one of them. Two, it’s going to require focus. So Medicare Advantage will only work in a subset of the markets in the country where the makeup of the physicians and the hospital systems allow it to work. So the risk, I think, for America is that there’s going to be less choice outside of highly densified urban areas for seniors and as we know, we’re in the early phase of the baby boomers going into Medicare eligibility.

I think that’s the unfortunate consequence, because a lot of the positives around Medicare Advantage which are just being applied to additional programs around population based health, clinical quality improvement programs, reducing readmission rates for seniors because of clinical quality programs, et cetera. Some of those will now only be benefited by people in more urban and densified areas where Medicare Advantage could still function.

Forbes: Let me ask you to sum up how does your industry avoid, in effect, becoming vassals of the government? How do we prevent that where, in effect, you’re told what you can offer, what you can charge, and if you play along, they’ll pat you on the head and let you continue to exist?

Cordani: Yeah. I don’t have the corner wisdom on this, but from my point of view, there’s one truism that has to take place. And if it does, then you have an opportunity. And that is the leaders of our industry are going to have to be able to demonstrate to our end user, the consumer, that there is a discreet value to the service we provide. Because if the consumer, the individual or currently the individual and the employer, doesn’t view that there’s a value to that service, then I think reform forces that compromise. Some of the programs and services and quality that we deliver potentially will overwhelm the system. Conversely, if the consumer and the employer and to some degree the physician partner views that we are actually creating value and we can demonstrate that in a sustainable way, then I think there’s some counteracting forces that keep what you just described as becoming an inevitable outcome.

And that’s what we’re focused on. We’re focused on competing for value, quality delivery, and we know we need to continue to innovate the services we’re providing for the benefit of our customers.

Health Care in Your Hands

Forbes: Why haven’t there been more people on what you call consumer-driven health savings accounts and the like where they in effect have more skin in the game and therefore are conscious of what things cost?

Cordani: I think there’s a few reasons. One, if look at some adoption curves, so we go back in history, the consumer-directed adoption curve almost matches exactly the 401(k) adoption curve. So leaving the health care industry, when employers were driving change in their pension strategies, the adoption curve actually looks almost precisely what you see in CDHP. So that’s point one.

Point two is I actually don’t believe there are many carriers, if you will, who do it well. And it’s a disruptive change. And there’s one truism about human nature–humans don’t necessarily flock to change. So this is a pretty disruptive change where in an environment over the last several decades that individuals have been relatively passive in their health care consumption, it’s a program and set of services that require you as a consumer to be a bit more active. So the good news is more employers, CEO level, I just talked to a CEO of a Fortune 100 company yesterday and he said, “We’re going to 100% consumerism program, and we’re doing it with you. It’s the only sustainable solution.” Those conversations are more frequent now. And what you need to have is a three-year strategy to convert your employees to be able to do that on a sustainable basis. Some have failed by trying to do it overnight without all the tools and it almost shocks the system and then you get rejection from the employees, which is to nobody’s benefit.

Forbes: You’re right about human nature. In the early ’90s we put in our own version of health savings accounts, and by golly, the carriers just were–they didn’t get it.

Cordani: Yes, yes.

Forbes: And it was tough and we persisted and now, thankfully, it’s much easier.

Cordani: We believe, just to be clear, there’s a basic recipe that’s easy to say and difficult to execute. There’s four things that need to be in place.

Awareness. So awareness of both the health issues and the choices. Incentive alignment, and there’s a variety of ways to garner the incentive alignment. Fund-based programs are one. Three is information transparency around quality and cost that is succinct and usable. And then four is assistance. That’s where your kind of health coaches or your navigation support resources come in. Because just like in other services, individuals do need some assistance, and it’s varied by person. Some it’s Web-based. Some it’s telephonic. Some it’s eyeball-to-eyeball. But when that recipe of four comes together, we see some really powerful results come forth. But if it’s only one or two of those levers that are used, you typically get an uneven outcome at best.

Forbes: Now, finally, selling overseas, places like China. What are you doing differently there in the kind of policies you’re offering to avoid the kind of mixed, hybrid, unworkable system that we have here in terms of when you sell individual policies? Is it high-deductible? Is it sort of health savings accounts, consumer-driven from the beginning?

Cordani: Sure. First, outside of the U.S., we see outstanding growth opportunity for our company. It is a cornerstone of our growth strategy. We’re going deep in some U.S. markets and product lines. And then we’re going global with the Cigna franchise. We currently exist in about 27 different countries today and we currently have in excess of five and a half million individual policies in force outside the United States.

So to the core of your question, we really play in two ways outside the U.S. other than for high-intimacy, ex-patriot coverage. One are supplemental products and services that individuals buy, typically middle-class, to supplement the government, state or provincial-sponsored programs.

Secondly, what we’re seeing, which I think is an interesting foreshadowing of what could happen here, is some employers in countries that are seeing more explosive growth, like China that you referenced, are asking and saying that for a subset of their population they want a solution where they can opt out of the state-sponsored system because they’re competing for talent. Could be final professionals, could be scientists, could be engineers, depending on their business. And the reason why they want to opt out of the system is because while everybody has access to care in the system, they’re struggling to get accessibility to the highest-quality physicians or hospitals. So we see that change as an area where we could add significant value. So outside the U.S., it’s a retail market for us. It’s a retail, highly transparent, direct-to-consumer marketplace that we see to be very vibrant and exciting for years to come.

Forbes: So when you go in a country like China, you sell directly to individuals, or is it mostly through employers?

Cordani: China, again, other than a business that’s explicit to cover employers expats, so think about small population, it’s essentially all direct to individual. Telemarketed, Internet-based, direct to consumer, TV-based distribution. And take a country like China. We’ve been actively selling in China for seven years now with a great joint venture partner. And I will be back there in September. I was just there in May; I’ll be back there in September. And by the end of this year, in China alone, I expect to have a million policies in force at the individual level already.

Forbes: And are these mostly what you would call consumer-driven policies?

Cordani: No, actually, they’re not consumer-driven. Mostly what they are is supplemental policies. So they will be for a slice of the system. So somebody might buy a hospital coverage. They might buy a surgery coverage. They might buy a cancer coverage. They’re slices now. But they will evolve, Steve, as the market evolves, to more comprehensive coverages as people are saying, “Well, the social system allows me access to care, but I can’t get the accessibility to the services I want and need.” And I would say derivatives of what we know as fund-based programs here will manifest themselves there.

Forbes: So, in effect, you’re selling beach head policies that are going to expand?

Cordani: Well stated. Very well stated. And that’s a real critical part of our strategy. Our strategy is a strategy of relationship with a customer, whether it’s here in the States with employers that we expand our relationship off of, or abroad with individuals, where we establish relationship and you expand as you understand that individual and you help them solve problems or fill gaps or voids that they need. I like the “beach head” terminology.